Adam Smith Revisited

By Chana B. Cox and Joseph J. CoxMarch 9, 2002 marked the 226th anniversary of The Wealth of Nations, by Adam Smith, the man who first scientifically formulated capitalism as an economic theory. Amidst recent demonstrations against capitalism and industry by Oregon eco-terrorists and WTO protestors, it is important to revisit Smith’s discussion of capitalism. In 1776 when The Wealth of Nations was published, the average life span in England was probably under thirty. Virtually all of most people’s incomes was needed to provide a subsistence diet, and while it was considered necessary for both men and women to own a single pair of shoes, the standards in the rest of Europe were not so lavish. We have come a long way thanks, in large part, to the industrial revolution which Smith’s theories helped to sustain. Unlike many of his critics, Adam Smith understood the free market is not a zero sum game. “Give me that which I want and you shall have this which you want.” A market exchange is voluntary and thus to the mutual benefit of both buyers and seller. Every market exchange tends to reward productivity and thus increase the wealth of a nation. Man does not live by bread alone, but he doesn’t live without bread either. In a developed economy each of us is dependent for every loaf of bread on the labor and cooperation of thousands of people we will never know. In such a world of complex dependencies amongst strangers, Smith understood it was better to rely on the “invisible hand” mechanisms of the market than on violence or the arbitrary will of those in political power. “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” True, capitalism produces great economic inequality, but those gaps measured in terms of consumables are much narrower than they may first appear. Smith recognized that even in the England of his day the poorest men and women were better off in terms of material goods than all but the most powerful men in non-capitalistic societies who were the “absolute masters of the lives and liberties of thousands.” Today, virtually everyone in the United States can afford a watch although few can afford a Rolex. Virtually all Americans have indoor plumbing, electricity, televisions, and telephones. In the United States we take such wealth for granted, and some of us think We should scrap modern technology and return to nature. As those in the undeveloped world know too well, only the affluent can afford such a view.The Wealth of Nations was a product of the ethical theories Smith developed in The Theory of Moral Sentiments. He understood capitalism does not itself produce virtuous people, but it does encourage some virtues even among those of middling character. Capitalism cannot work its magic without the rule of law to restrain fraud and criminal negligence, but the market itself tends to discourage fraud because we won’t continue to buy our dinner from butchers, brewers, and bakers who cheat us. The market encourages self control, if only because we postpone short term pleasures in the interest of acquiring long term pleasures. The market encourages education if only as a means of improving one’s condition in life, and it encourages cooperation rather than violence as a way of acquiring material possessions. “Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest in his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.” Order, not chaos, will emerge out of that competition. Smith realized too that the checks and balances of the invisible hand extend far beyond the economic sphere. The seeming chaos of freedom – in the market, in religion, in the arts, and in the sciences – allows human systems to adapt and to thrive. Conversely, the seeming rationalism of central planning is a recipe for stagnation and poverty. No, the good of the whole is far more likely to result from the freedom of the many to pursue their own individual ends than from the benevolence of the few who would impose their will on others. “By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it,” wrote Smith. As we look forward to the future we should continue to apply the lessons learned from this man whose theories have provided the framework for our present prosperity. _____________________________________________________________________________________ Chana B. Cox, Ph.D, is senior lecturer in the Humanities at Lewis & Clark College, and an academic advisor to Cascade Policy Institute, a Portland, Oregon think tank. Joseph J. Cox is an international tax specialist with a Portland firm. For more information, visit www.cascadepolicy.org.